Month-end Libor yardstick for NRE deposit rate

 According to bankers, the NRE deposits received during the month will be offered a rate at 250 basis points over the Libor ruling at the end of previous month.

 Libor remains the benchmark till the end of next month at which the new deposits will be accepted and so on.

 Various banks had expressed their anxiety and represented to the RBI on how to fix the interest rates as the Libor keeps changing every day.

 With the vast network of PSU banks, real time communication of the rates could become difficult, thus resulting in anomaly in interest rates offered on deposits received on the same day.

 The RBI fixed the interest rates on NRE deposits on July 17 by capping it at 250 bp over Libor. Earlier, the banks had the discretion to charge the interest rates which had resulted in some banks offering very high rates to lure NRI deposits as compared to prevailing market rates.

 The measure was taken to curb the arbitrage enjoyed by non-resident Indian investors. This is because, interest rates in India are much attractive compared with that in other countries which is also the reason for the huge foreign investment inflows as well.

 Backed by inflows rupee has been strengthening vis-a-vis dollar for quite some time now. Most commercial banks used to offer 5 per cent interest on NRE term deposits in the 1-3 year tenor and around 5.25 per cent for deposits over three years.

 However with the cap, the banks could pay only 3.70 per cent for deposits in the 1-3 year maturity. NRE deposits have emerged as one of the most lucrative opportunities to park foreign funds as the another deposits scheme - foreign currency non resident (bank) does not fetch such high interest rates.